Premiums and penalties for surplus and deficit education: Evidence from the United States and Germany
Introduction
An intriguing finding in the literature on the role of education in the labor market concerns workers who have acquired either more or less education than they say their jobs require. Contrary to predictions from a rigid, structural view of jobs (Thurow, 1975) several authors have found, for several countries, that the labor market rewards workers for having completed more schooling than their jobs require and penalizes workers who have “too little” schooling (Duncan & Hoffman, 1981, Hartog, 1985, Rumberger, 1987, Alba-Ramirez, 1993, Sicherman, 1991, Cohn & Khan, 1995, Kiker, Santos & de Oliveira, 1997). However, none of these studies have analyzed either changes within countries over time or differences across countries at a point in time.
In this paper, we extend the existing literature in two ways. First, we investigate how structural changes in the labor market in the United States over the 1970s and 1980s (Levy & Murnane, 1992) have affected the rewards and penalties associated with having too much or too little schooling for a job. Second, we investigate whether the same rewards and penalties for surplus and deficit education observed in the United States apply in Germany, a country with a much more structured educational system and labor market. We test explicitly for differences over time in the United States and at a point in time between the United States and Germany using a joint model. A universalistic view of labor markets would predict more similarity across countries than across time. This is precisely what we find.
Section snippets
Background
In 1976, the Panel Study of Income Dynamics became the first national survey to ask workers explicitly about both years of completed schooling and the amount of schooling required by the jobs they held. An analysis of these data by Duncan and Hoffman (1981) revealed considerable amounts of, as well as positive wage payoffs to, overeducation. Regardless of race and sex, between 40 and 50% of workers reported having more schooling than their jobs required. Roughly one in ten workers reported
Importance of cross-time and cross-country comparisons
The labor market in the United States has changed substantially over the last two decades (for a thorough discussion of these changes see Levy & Murnane, 1992). These changes include increases in both the supply of and demand for highly skilled or educated workers, significant increases in the returns to schooling, and the apparent introduction of non-neutral technology that disproportionately benefits more educated individuals. Many analysts consider these changes to be the most important
Data
Our information on the extent and economic effects of overeducation in the United States and Germany comes from the Panel Study of Income Dynamics (1976 and 1985 waves) and The German Socio-Economic Panel (1984 wave), respectively. The Panel Study of Income Dynamics (PSID) is an ongoing longitudinal survey that provides information on a representative national sample of over 5000 households. Interviews are usually conducted with the ‘head’ of each family, who is defined as the husband or male
Sample
Our sample includes men and women aged 18–64 who were employed at the time of the survey and successfully reported the information necessary to calculate their completed education, job-required education, wage rate, and work experience. To ensure cross-national comparability our sample is restricted to non-black men and women in the United States and West German citizens of German nationality.
The extent of surplus and deficit education over time and across countries
Before examining the returns to surplus education over time and across countries we first describe its extent. Table 1 presents the distribution of matched, surplus, and deficit education in the United States (1976 and 1985) and in Germany (1984) by gender. The extent of overeducation in the United States declined for both men and women from 1976 to 1985. In 1976 nearly 40% of men and women were overqualified for their job. By 1985 this percentage had declined to a little over 30%. This decline
Components of human capital: education and experience
Research carried out by Sicherman (1991) suggests that employers may trade off between formal education and on-the-job training when hiring new employees. We conduct a similar analysis using total work experience in place of job tenure. If work experience and job tenure are similar, then workers with the least work experience should have the highest prevalence of surplus education and workers with the most experience should have the highest prevalence of deficit education. In Table 2 we report
Economic value of surplus and deficit education
The previous two sections have compared the prevalence of surplus and deficit education over time in the United States and between the United States and Germany. In this section we examine the economic rewards and penalties for having too much or too little education. To do this we report the results from estimated earnings functions where an individual's completed schooling is decomposed into the number of years required for his or her current job and the number of years of surplus or deficit
Significance of differences over time and across countries
Thus far we have compared the returns to education and experience within countries and time periods by examining the results from separate regressions. We now formally test for differences across time and between countries using two methods: (i) fully interacted models (which include a set of variables that are the result of interacting a year or country dummy variable with each variable in the regression); and (ii) Chow tests for differences in parameters across samples. The results of these
Conclusions
Although there were notable and well-documented differences between the labor market in 1976 and the labor market in 1985 in the United States, as well as substantial institutional differences between school to work transitions in the United States and Germany, we find little evidence that these differences significantly affect the patterns of compensation associated with over- and undereducation. In all cases, those with surplus education received a wage premium and those with deficit
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